Financial Ratios – Nike and Adidas

Financial Ratios – Nike and Adidas

Evaluate each company’s liquidity relative to its competitor, then compare both companies to the industry averages.

Liquidity ratio refers to financial ratios that evaluate a company’s capability to service its short-term debt obligations. These metrics gauge the extent to which companies may employ current assets to pay short-term liabilities. Liquidity ratios include the current and quick ratios. The current ratio is a type of liquidity ratio that evaluates the company’s ability to repay its short-term debt obligations using the current assets (Kadim, Sunardi, & Husain, 2020). The current ratio is computed by dividing the current assets by the current liabilities. Nike’s current ratio was 2.55, indicating its short-term assets can pay up to two times its current liabilities. This ratio signifies good financial health since Nike efficiently services its short-term obligations using its current assets. On the other hand, Adidas’ current ratio was 1.2, indicating the company’s short-term assets are sufficient to pay the firm’s current liabilities (Kadim et al., 2020). This ratio indicates Adidas’ current assets are just enough to pay its short-term obligations. Notably, the sectorial current ratio was 1.57, which was lower than Nike’s and higher than that of Adidas. Therefore, Nike features better financial health since its current ratio is higher than the industries and that of Adidas. On the other hand, Adidas performed poorly than the industry since its short-term debts are relatively high. Quick ratio evaluates a company’s effectiveness in servicing its current debt using only its quick assets, which can be converted to cash within 90 days. Nike’s quick ratio was 1.56, which indicates its quick assets can pay up to one and a half times its debt. Nike features good financial performance, seeing that its quick assets outnumber its short-term obligations. Adidas’ ratio was 0.78, indicating the firm’s quick assets are not sufficient to cover the short-term debt. Hence, the company did not perform well financially. Notably, the industry’s quick ratio was 0.96, which is higher than Adidas’s, suggesting the firm’s performance was lower than that of the industry. Nike’s quick ratio was higher than that of the sector. Hire our assignment writing services in case your assignment is devastating you.

Evaluate each company’s solvency relative to its competitor, then compare both companies to the industry averages

Solvency ratios are also referred to as leverage ratios, and they analyze a firm’s ability to perform its operations indefinitely by comparing the level of debt with assets, equity, and earnings. The solvency ratio evaluates a company’s going concern and its ability to service its long-term obligations (Morales-Díaz & Zamora-Ramírez, 2018). These ratios include debt-to-equity and leverage ratios. The debt to equity is a solvency ratio that compares the firm’s total debt against the total equity. It indicates the proportion of a company’s assets financed with debt and that which is funded through the issuance of stock. This ratio is computed by dividing the total liabilities by the total equity. Nike’s debt-to-equity ratio was 1.02, which suggests that both investors and creditors have an equal stake in the company’s assets.

Nike features a competent capital structure that constitutes equal proportions of debt and equity. Adidas’ debt-to-equity ratio was 0.64, which indicates that the company is financed with slightly more liabilities than equity. Nonetheless, Adidas’ debt levels are not considered risky, even though it is considerably high. The industry’s debt-to-equity ratio is 0, 64, suggesting that most companies employ more debt than equity funding to finance their business. Financial leverage is a ratio that evaluates the capital gain earned from the operations financed with debt against the cost of debt incurred in its acquisition. Financial leverage is computed by dividing the total debt by the shareholder’s equity. Nike’s leverage ratio was 3.61, suggesting the company’s debt is three times the shareholders’ equity. Therefore, the majority of Nike’s assets are financed through debt, which indicates the company is highly leveraged. On the other hand, Adidas’ financial ratio was 3.26, which indicates the company employs more debt than equity in funding its operations and the purchase of its capital assets. The sectorial financial leverage ratio was 2.4, which was considerably lower than that of Adidas and Nike, indicating that both firms are more highly leveraged than other firms in the sector.

Evaluate each company’s profitability relative to its competitor, then compare both companies to the industry averages.

Profitability ratios evaluate a company’s effectiveness in generating profit from its revenue. This ratio evaluates a company’s effectiveness in maximizing shareholders’ wealth and generating income from its assets. Profitability ratios include the net profit margin that computes the percentage of profit generated by a company from every dollar of revenue earned (Morales-Díaz & Zamora-Ramírez, 2018). The net profit margin ratio is computed by dividing the net profit with the revenue. Nike’s net profit margin was 6.79, suggesting Nike earns 6 cents for every dollar it earns as revenue. On the other hand, Adidas’ net profit margin was 8.11%, indicating the company earns 8 cents for every dollar of revenue earned. This analysis indicates that Adidas is more efficient in generating income from the revenue earned as opposed to Nike. The sectorial net profit margin was 11%, which was higher than both Nike and Adidas. The industry’s ratio suggests that other firms operating in the industry are more efficient in maximizing the profit earned from the revenue made by companies.

References

Kadim, A., Sunardi, N., & Husain, T. (2020). The modeling firm’s value based on financial ratios, intellectual capital and dividend policy. Accounting, 6(5), 859-870.

Morales-Díaz, J., & Zamora-Ramírez, C. (2018). The impact of IFRS 16 on key financial ratios: A new methodological approach. Accounting in Europe, 15(1), 105-133.

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The purpose of this assignment is to employ accounting principles and relevant business practices to evaluate a company’s performance and financial position through a comparison to industry data.

Financial Ratios – Nike and Adidas

Locate the Critical Thinking CT-4 problem at the end of Chapter 9 in the textbook. This will serve as the structure for your assignment. Begin by choosing two competing publicly traded companies from the list below.

Coca-Cola and PepsiCo
Home Depot and Lowe’s
Walmart and Target
Nike and Adidas
Review the competing companies’ ratios provided at the MSN Money website: http://www.msn.com/en-us/money. For the pair of companies selected, you will need to use each company’s stock symbol to locate the liquidity, solvency, and profitability ratios on the MSN Money website. As part of your research, you will need to identify each company’s stock symbols prior to accessing the website, as this information will not be provided to you.

Once you know each company’s stock symbol, begin by entering the appropriate company symbol in the “Quote Search” search box on the MSN Money website. Under the “Analysis” heading, use the Growth, Profitability, Price Ratios, Financial Health, Trading Statistics, and Management Effectiveness information to complete a 750-1,000 word comparison addressing the following:

Evaluate each company’s liquidity relative to its competitor, then compare both companies to the industry averages.
Evaluate each company’s solvency relative to its competitor, then compare both companies to the industry averages.
Evaluate each company’s profitability relative to its competitor, then compare both companies to the industry averages.
Note: You will be assessed on your ability to evaluate each company’s performance based on the information provided at MSN Money. You do not need to calculate the ratios for individual companies or the industry averages.